Impact of Livestock

Industrialization on Smallholders

Clare Narrod Joint Institute for Food Safety and Applied Nutrition

University of Maryland

1

Talk covers

1. Demand and supply trends

2. Discuss a livestock industrialization project (2001-2006) –investigating what has happened to smallholders in the process of industrialization (poultry sector)

3. Will changing demands for food safety, food quality, and ensuring animal health disfavour smallholders?

Volume produced in developing world outpaced rest (growth in E. & S. Asia, LA, and Caribbean)

3

0

20

40

60

80

100

120

140

160

180

200

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Meat Production in millions of MT

Developed Countries Developing Countries

Includes USSR and ex Soviet Countries Narrod et al, 2011

4

0

50

100

150

200

250

300

350

400

450

500

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Milk Production in millions of MT

Developed Countries Developing Countries

Volume produced in developing world outpaced rest

Includes USSR and ex Soviet Countries Narrod et al, 2011

Growth due to demand and supply trends

5

Trends

As income rises a smaller share of food budget spent on grain and larger share spent on HVA, processed and prepared food

Income effect

Economic growth and income Urbanization Move to more industrialized

process Institutional changes Demand for goods with specific

attributes

Avg annual growth in global per capita consumption of food items (%)

Food item(a) 1962-1971

1972-1981

1982-1991

1992-2001

2002-2007

1962-2007

Cereals (excluding beer)

0.4 0.7 0.3 –0.3 –0.1 0.3

Fruits (excluding wine)

1.4 0.7 0.6 1.4 2.4 1.3

Pulses –2.5 –1.3 –0.3 0.4 1.2 –0.9 Vegetables –0.2 1.3 1.2 3.9 1.1 1.5 Eggs 1.4 0.8 1.7 2.5 0.9 1.4 Fish, seafood 2.0 0.4 1.1 2.4 0.8 1.4 Meat 1.7 1.0 1.2 1.2 0.8 1.2 Milk (excluding butter)

0.1 0.2 –0.1 0.6 1.5 0.3

6

Increased demand for HVA, highly perishable Narrod et al, 2011

Growth in production/consumption occurred despite price fluctuations

0

500

1000

1500

2000

2500

3000

3500

4000

450019

78

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

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1994

1995

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2001

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2003

2004

2005

2006

2007

2008

2009

Live

stoc

k , U

S$ p

er to

n (c

onst

ant a

t 200

5)

Past trends of real prices of livestock products, 1978-2009

BeefPorkPoultry

7

Narrod et al, 2011

By 2030 Avg meat prices expected to surpass 1990-2000 Avg (in real terms)

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-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Maize Beef Pork Poultry

Gro

wth

rate

s pe

r yea

r (%

)

1980-1990 1990-2000 2000-2005 2005-2015 2005-2030

Due to lower supplies, higher feed costs, and rising demand for cheaper meats (poultry & pork) Economic recovery will increase consumption of meats relative to cereals

Narrod et al, 2011

Moved to more industrialized process to produce high yielding product with specific attributes

• Establishment of specialized enterprises using hired labor, borrowed capital, and purchased inputs

• Increased trade by specialized breeding companies – poultry and swine

• Research done in US and Europe; product sold worldwide through franchises – Flow of bovine and swine genetic

resources segmented • trade w/in high-productivity systems • trade within low-productivity systems • Frozen semen for dairy; difficult for

swine – Not so much for poultry

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0

200

400

600

800

1000

1200

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Swine breeding animals Bovine breeding animals

Bovine semen Baby Chicks

World export of breeding (NA and Europe)

2.5 billion

151 million

Narrod et al, 2011

Projected growth of poultry and eggs production and consumption - next 20 yrs

10

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Poultry: Annual Growth Rate between 2010 and 2030

Consumption Production

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Eggs: Annual Growth Rate between 2010 and 2030

Consumption Production

Developing countries still not meet egg demand by 2030 Narrod et al, 2011

Increases in Productivity in LDC’s Paralleled those in DC’s

Developing countries steadily transiting to more specialized enterprises using hired labour, borrowed capital, and purchased inputs so as to produce a more uniform quality livestock product under different modes of industrial organization so as to meet demand worldwide.

Commercial Broiler Supply Chain: Thailand

Poapongsakorn, et al 2003

What has happened to smallholders?

Change in the size distribution of poultry farms: Thailand

% change

Flock size (birds/farm) 1988 1998 2003 1988-98 1998-2003 1988-2003

1-19 2,267 1,948 362 -14 -81 -84

20 - 99 946 1,146 581 21 -49 -39

100 - 999 27 66 68 144 3 152

1,000 - 9,999 9 13 14 44 8 56

10,000 and over 0.5 2 4 300 100 700

Total no. of farms ('000) 3,250 3,174 1,028 -2.3 -68 -68

Poapongsakorn, et al 2003

Scaling-up for Hogs in S. Luzon (Phil.)

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900

1980

1981

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1988

1989

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In '0

00 h

eads

Commercial

Backyard

(1980-2000)

Costales, 2003

What is happening to the smallholders?

• Most work to date is descriptive, little systematic empirical analysis

• (2002 – 2006) – group of collaborators set out to empirically capture various factors affecting profitability including transaction costs and efforts to mitigate against environmental externalities for different size producers in a number of countries involving HH surveys

• Case studies in Thailand, the Philippines, India, and Brazil

Research Objectives • Understand the forces that affect the relative

competitiveness of different scales of production operations in livestock (and by hypothesis are displacing smallholders)

• Quantify the relative contribution to lack of competitiveness from transaction cost barriers and market distortions that impact small-scale operators more than large.

Two Fundamental Premises (1) Transactions costs, hidden subsidies to better off

producers that lead to unfair competition, and negative environmental externalities all decrease the social good

(2) More “efficient” users of inputs in securing farm financial

returns will eventually drive less efficient ones out of the market; they are potentially more competitive

Average Profit per kg Broiler

0

2

4

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8

10

12

US ce

nt/K

g

<10,000

>10,000

Mixed results

Delgado et al 2003

Farm Size

Smallholder <10,000 birds

Large/Commercial >=10,000 birds Country

Independent Contract Independent Contract India

rupees/bird 13.13 1.03 10.93 3.16 US$/kg* (0.11) (0.01) (0.09) (0.03) rupees/bird 11.36 9.98

Average profit without family labor cost

US$/kg* (0.10) (0.09) rupees/bird 12.40 0.04 10.80 3.01 US$/kg (0.11) (0.003) (0.09) (0.03) rupees/bird 10.59 9.85

Average profit with family labor cost

US$/kg (0.09) (0.08) Philippines

pesos/kg 1.59 4.05 1.07 3.96 Average profit without family labor cost

US$/kg (0.03) (0.08) (0.02) (0.08)

pesos/kg 1.34 3.98 1.06 3.95 Average profit with family labor cost US$/kg (0.03) (0.08) (0.02) (0.08)

Thailand Forward

Contract & Independent

Per–bird Wage Contract

Forward Contract & Independent

Per–bird Wage Contract

baht/kg live–weight 0.71 1.35 2.48 1.51

Average profit US$/kg live–weight (0.02) (0.03) (0.06) (0.04)

Brazil real/kg live–

weight 0.05 0.06 Average profit US$/kg live–

weight (0.02) (0.02)

Average profit per unit of output of liveweight broiler

Large

=

Small indep >$ than

Large indep

= CF Better off

Delgado et al 2003

Findings-Optimism for smallholders

• Small farms are not less efficient in all cases at securing profits per unit of output when family labour and environmental externalities are controlled for

• For smallholders to survive livestock industrialization process, the key issue is for them to have the ability to use their farm resources more efficiently than large-scale producers

• If large–scale producers are more efficient on average, then they will be able to drive their costs down to survive on smaller unit profits but bigger volume of sales driving smallholders out of the market

• But smallholders have a chance; the issue for them is access to output markets, since they face high transaction costs in selling

• Contract farming schemes enables smallholders to remain just as profitable as medium and large farmers if they are able to successfully link to the rest of the supply chain

Findings: Internalizing Externalities Does Not Explain Scaling Up

• In general, internalizing negative externalities helps explain why some farms are more or less profit efficient

• However, differences in environmental mitigation do not seem to be strong explainers of differences in profit efficiency across sizes of operations

• Farm-specific transaction costs, such as access to credit and market information, greatly matter in explaining relative profit efficiency across farms are the culprit

• The key to pro-poor livestock development is institutional development to overcome asymmetries in access to information and assets

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Findings: Contract Farming Works • In some cases, contract farmers have higher profits per

unit of output than do independent farms – Contract farmers tend to be more profit efficient that

independent farms in most cases – Form of contract matters

• Contract farming has real potential to help better

incorporate smallholders in high-value supply chains; needs policy attention to work

Future

• Demand for livestock products will rise much faster in developing counties

• Demand will be stimulated by domestic production – Meat- China – Milk - India – Egg/poultry products – S. East Asia

• HVA products highly perishable

– livestock products subject to strict SPS & food safety requirements

• Stringency of SPS requirements will

exclude some

• Developing country’s domestic consumers who will provide producers a dynamic market domestically

• Poor producers could miss growing demand opportunities if they are unable to comply with regulations and requirements of modern market chains

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Events Beyond Control of Farmers and Integrators

• There are large economies of scale in marketing chains, where transactions costs also abound

• Food safety concerns and demand for reliable timing and quality drives concentration of supermarkets

• Cheaper to monitor safety & quality from a few larger farms—even most reliable and safe small farmer may be unattractive

• Scaling-up of wholesaling probably leads to scaling-up of primary producers

Reality is that Smallholders Might Disappear

Even with market access they may be unable to meet: • High transaction costs for certain market outlets • Costs of compliance to meet standards:

– Import requirements...disease status, traceability, animal welfare, GAP, SPS, compulsory inspection

– Product requirement.....quality cuts, hygiene standards, packaging, labelling, traceability

• Changing marketing channels – concentration in export, processing, and retailing – changes in vertical coordination of supply chains (for example,

Thailand is switching from contract farming to full vertical integration because of disease threat (AI) as well as better meet EU stringent requirements for food safety and animal welfare) (NaRanong, 2007)